Four Corners Property Trust, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. FCPT is a restaurant-property REIT that primarily leases properties to Darden under triple-net leases and also operates six LongHorn Steakhouse restaurants. It owned 424 properties at quarter-end, including 418 leased to Darden. Comparisons with 2015 are not like-for-like: FCPT’s real estate operations began with the November 2015 spin-off, while prior-period results largely reflect the restaurant business.
Financial results and position
| Metric | Q2 2016 | Six months 2016 |
|---|---|---|
| Total revenue | $30.9 million | $62.0 million |
| Net income | $14.8 million | $109.1 million |
| Diluted EPS | $0.25 | $1.84 |
| Operating cash flow | Not separately provided | $33.3 million |
| FFO per diluted share | $0.33 | $0.66 |
| AFFO per diluted share | $0.30 | $0.60 |
- Q2 rental income was $26.2 million; restaurant revenue was $4.7 million. Six-month rental income was $52.5 million and restaurant revenue was $9.6 million.
- Q2 net margin was approximately 47.9%; six-month margin was approximately 175.9%, largely reflecting an $80.5 million income-tax benefit from reversing deferred tax liabilities in connection with the intended REIT election. These margins are therefore not representative of recurring operating performance.
- Restaurant operations produced net income of $11,000 in Q2 and $75,000 for six months, versus $289,000 and $666,000 in the comparable 2015 periods. Q2 restaurant expenses were 99.8% of revenue, compared with 93.8% a year earlier.
- Cash and cash equivalents were $38.7 million, down from $98.1 million at year-end. Six-month financing cash outflow was $92.6 million, including dividends paid. Dividends declared were $0.2425 per share in Q2 and $0.4850 per share for six months.
- Real estate investments, net, were $818.4 million; total assets were $864.7 million. Notes payable were $400 million gross and $393.1 million net of financing costs. The $350 million revolving facility was undrawn; stated available capacity was $350 million.
- The term loan matures in November 2020. Interest-rate swaps hedge $400 million of variable-rate debt; management reported an average rate including swaps and financing-cost amortization of 3.5% at June 30.
Changes, outlook, and risks
- Revenue and GAAP earnings rose substantially versus 2015 because the current period includes the spun-off real estate business; prior-period comparisons do not reflect that portfolio. Six-month earnings also include the one-time tax benefit related to the REIT election.
- Management’s stated strategy is to pursue acquisitions and tenant and asset diversification, while seeking consistent cash dividends and cash-flow growth. The filing provides no specific earnings, FFO, or acquisition guidance.
- Subsequent to quarter-end, FCPT invested $7.8 million in seven restaurant properties in three states, funded with cash. The properties were fully occupied, had a 17.2-year weighted average lease term, and an average cash lease yield of 7.0%.
- Tenant and brand concentration are material: Darden was the sole tenant for approximately 99% of properties; Olive Garden represented approximately 72% of properties and 74% of rent from the leases. The portfolio’s Darden dependence exposes rental income to tenant credit and operating performance.
- Derivative liabilities increased to $9.3 million from $0.5 million at year-end; the company estimated $3.4 million of accumulated hedge losses would be reclassified to interest expense over the following 12 months. The filing also describes potential settlement obligations if specified default provisions are breached.
- FCPT intended to elect REIT status for 2016 and said it believed it had satisfied the requirements, including the purging distribution. Failure to qualify could result in corporate-level tax. The spin-off also imposed certain restrictions on transactions and share issuance for two years, subject to exceptions.
- Management reported no material change in risk factors, no material adverse effect expected from ordinary-course litigation, and effective disclosure controls as of June 30, 2016. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether FCPT completes its 2016 REIT election and maintains compliance with REIT distribution and other requirements.
- Darden’s credit quality and the degree of rental-income concentration, including the Olive Garden exposure.
- Recurring operating performance excluding the $80.5 million tax benefit and the effects of the spin-off; review FFO/AFFO definitions and their limits as non-GAAP measures.
- Dividend coverage against cash available for distribution, given cash fell to $38.7 million after financing outflows and dividends.
- Debt and interest-rate exposure, including swap fair-value movements, future interest expense, and access to capital for acquisitions.
- Performance and funding of the seven post-quarter acquisitions and progress toward the stated tenant and asset diversification strategy.